Rates on Hold Another Month

Update The Reserve Bank left its key interest rate unchanged for a 10th month as it juggles competing challenges at home and abroad, with some economists predicting the rates pause to extend for months to ...

Update The Reserve Bank left its key interest rate unchanged for a 10th month as it juggles competing challenges at home and abroad, with some economists predicting the rates pause to extend for months to come.

The RBA's cash rate remains at 4.75 per cent, a level reached when the board lifted rates by 25 basis points last November.

CBA's fixed three-year mortgage rates will drop by 16 basis points, moving the three-year package rate to 6.43 per cent from 6.59 per cent. It also shaved 11 basis points from its one-year fixed rate package, taking it to 6.48 per cent.

The bank joins St George Bank, Bank of Melbourne, and Bank SA - all part of Westpac - in lowering rates on fixed-rate loans this week.

RBA dilemma

The dilemma facing the RBA in getting its rates settings right is underlined in its commentary. Recent plunges on global markets have dimmed short-term growth prospects, while the rekindled mining boom continues to stretch parts of Australia's economy, stoking underlying inflationary pressures.

"Overall, the near-term growth outlook continues to look somewhat weaker than was expected a few months ago," RBA governor Glenn Stevens said in the accompanying comments.

"Beyond the near term, growth is still likely to be at trend or higher, unless the world economic outlook continues to deteriorate."

The Australian dollar initially edged higher on the decision before backtracking. The dollar rose about one-fifth of a US cent to $US1.0546 by 5pm. Shares extended their falls to be down about 1.6 per cent in recent trading.

RBA outlook

Today's decision means the RBA has left rates unchanged for nine consecutive meetings - with one month off in January - making it the longest period of stability since the 12-meeting stretch between April 2005 and May 2006 when rates were held at 5.5 per cent.

Some economists predict the RBA will leave the cash rate at 4.75 per cent for some months even though financial markets are still pricing in the equivalent of three 25 basis-point cuts by December.

"The RBA is still maintaining that it will continue to watch the evolving outlook on growth and inflation but for the time being the events offshore are keeping the RBA on the sidelines," said JPMorgan economist Helen Kevans.

"The RBA was pretty explicit in its reason for keeping rates on hold," she said. "Aside from that the domestic economy is still benefiting from firm investment and soaring terms of trade but there are a number of uncertainties keeping the RBA on hold."

NAB head of Australian economics and commodities Robert Brooker agrees the RBA is torn between competing pressures.

"The sort of message they're sending is that they're caught between some risks that in the near-term will make things soft but in the longer term the risks are likely to cause inflation to rise," Mr Brooker said.

"There's no place for them to take any action now. If they take action now it would only to see it be unwound in the future and reversed."

Volatility

A month ago, the RBA implied that it was inclined to lift interest rates but opted not to because of the volatile financial markets worldwide. Today's statement reiterates some of those concerns, given big falls again on European markets overnight, while Wall Street was also poised for a big retreat when markets there reopen later today after a holiday yesterday.

"Conditions in global financial markets have been very unsettled over recent weeks, as participants have confronted uncertainty about both the resolution of sovereign debt problems and the prospects for economic growth in Europe and the United States," said Mr Stevens.

Plunging sharemarkets last month had prompted expectations several weeks ago that the central bank would certainly cut rates at today's meeting, but calmer trading conditions in recent weeks reduced the likelihood of a rate cut today - notwithstanding falling share prices over the past three days. Economists had widely expected today's decision by the RBA to stay put.

On inflation

While global market swings dominate the daily headlines, the RBA has to steer the economy past a range of threats.

One of those challenges is inflation, with the most recent headline figures well beyond the RBA's preferred 2-3 per cent, coming in at 3.6 per cent for the June quarter.

Against though, TD Securities - Melbourne Institute's monthly inflation gauge, released Monday, showed prices actually fell 0.1 per cent in August, the first deflation in almost two years.

Mr Stevens today noted that while consumer price inflation should start to decline towards the end of the year "as temporary weather-related effects reverse", measures of underlying inflation had risen steadily through the year.

"While they have, to date, remained consistent with the 2-3 per cent target on a year-ended basis, the board remains concerned about the medium-term outlook for inflation,'' Mr Stevens said. ''A key question will be the extent to which softer global and domestic growth will work, in due course, to contain inflation.

Tomorrow's release of national accounts figures will show whether the economy has recovered from the floods and cyclones in the March quarter, which saw gross domestic product sink 1.2 per cent. Economists are tipping a 1 per cent increase for the June quarter.

RBC Capital Markets economist Su-Lin Ong said uncertainty has emerged as a key theme in the RBA’s statement today.

‘‘Consistent with its past behaviour, Governor Stevens’s ‘path of least regret’ in times of uncertainty is to ‘just sit still’ and wait for further information and data,’’ said Ms Ong.

On Thursday, the Australian Bureau of Statistics will release another key economic indicator with their monthly labour force data. The economy probably added a net 10,000 jobs in August, economists predict, leaving the jobless rate unchanged at 5.1 per cent